GROWTH ACCOUNTING

Intermediate Macroeconomics
ECON 304
Prof. Elisa Belori
Colorado State University
These notes are based on Chapter 7 of the book. This is my
advise on how to use these slides:
1
Skim over them. You will not understand many concepts but
you will get an idea of what is covered in the chapter. You
will also have a sense of which parts of the chapter you need
to focus on and which ones you can read just for fun.
2
Read the chapter. Take your own notes on the most
important parts of it.
3
Get back to the lecture notes and complete them with your
personal notes. Make sure you understand every single bullet I
have included in here. If I wrote it in my notes, it means I
think it is important so you need to make sure you know and
understand it.
4
Enjoy !
Growth Accounting
Typically, growing economies are experiencing growth in both:
1) the factors of production (capital and labor) and
2) the total factor productivity
A useful exercise is to measure how much of the growth in
output over a given period is accounted by:
1
Growth in each input: Capital and Labor
2
Growth in total factor productivity
This exercise is called Growth Accounting
We have been working with the following production function
Y = zF(K, N)
In order to do Growth Accounting we need to assume a
specic function F
The Cobb-Douglas production function is the more widely
used in Macroeconomics and it is:
F(K, N) = K
a
N
1a
where a is a constant between 0 and 1 and it represents the
fraction of income that goes to capital (capital income).
Based on US data, we will use:
a = 0.3 ; (1 a) = 0.7
.
Suppose that the stock of capital in the US is
K = $7420 billion
and aggregate employment is
N = 59 million
Moreover, suppose that total factor productivity in the US is
z = 8
This means that, using the Cobb-Douglas production
function, US GDP (output) is equal to
GDP = 8 7420
0.3
59
0.7
= $2012 billion!
Alternatively, we can use the Cobb-Douglas production function to
calculate the US total factor productivity. We call it the Solow
residual and it is calculated as
z
us
=
Y
us
K
0.3
us
N
0.7
us
where
Y
us
is US real GDP
K
us
is the US capital stock
N
us
is US employment
z
us
is called the Solow residual
It is the output that remains to be accounted for after we
measure the contribution of capital and labor to output
It represents
New inventions
Good weather
New management techniques
New favorable government regulation
Better allocation of resources
Etc, Any other factor that causes more than F(K, N) output
to be produced, given K and N
The US data
Using the US data, the last column in the table below show the US
Solow Residual. For example, in 2010 it was
z
US
=
13088
46544.5
0.3
139.07
0.7
= 16.45
The Productivity Slowdown in the US
The picture below shows the evolution of the Solow Residual in the
US from 1950 to 2011.
The picture shows that the growth in total factor productivity has
been high in the US since the 50s. However, there was a decrease
in productivity growth in the late 60s and until the 80s. This is
known as the US Productivity Slowdown
There are dierent theories about what happened during the
Productivity Slowdown
1
One explanation is that it is due to a measurement error.
That was a period of shift from manufacture production to
production of services and services are harder to measure
2
Another is that the early 70s was the beginning of the
Information Revolution when computers and information
technology were adopted and it was a learning period for
workers
In learning periods, productivity can be low because workers
are spending time on the job learning instead of producing
According to the Solow model, the growth in total factor
productivity (z) can explain why there has been constant
growth in real GDP per capital in the US in the last century
Will it continue that way?
Yes, if z keeps growing in the future... Will it?
In the Solow model, z is exogenous... we dont really know
why it grows
So, based on what we have studied so far, we can not tell if z
will keep growing or not and therefore, if the US will keep
growing or not.
Growth after a recession
If the trend is that GDP is growing at 2% , it has to grow
faster, after a recession, to catch up and get back to trend
After the last recession in the US, GDP doesnt seem to be
catching up. Two explanations for this could be:
1
There may be reasons why the recovery this time will take
longer
2
It may also be that this time GDP will keep growing at 2% for
now on and it will never catch up to the previous level (ie.
there was some permanent loss in production capacity with the
recession)
This is an active topic in Macroeconomic research right now